A lot of people have been justly offended by the Solyndra scandal, in which the Obama administration squandered $535 million in a failed solar-energy company backed by one of Obama’s largest donors. But $535 mill in failed loans is chump change for this administration. Obamacare, according to the White House, will waste over $3 billion on faulty loans to state-sponsored health insurers called CO-OPs. It’s bad enough that taxpayer funds are going down the tubes. But internal documents show that the administration isn’t particularly bothered by it.

First, some of the backstory. When moderate Democrats balked at the government-run “public option” in their health-care bill, they compromised by creating state-sponsored insurers called Consumer Operated and Oriented Plans, or CO-OPs. These CO-OPs, however, are not to be confused with private co-ops, which are privately sponsored cooperative enterprises. The Obamacare CO-OPs were designed to fail.

The Obamacare CO-OPs were allocated $6 billion in subsidized, cut-rate loans, so as to ensure that they would meet state capital requirements. (Insurers have to have a certain amount of money in reserve in order to pay out the claims of their beneficiaries.) Interest on the loans would be a point or two less than Treasurysâ€”a nice deal, if you can get it. But the bigger problem, as Bradford Gray of the Urban Instituteexplained last summer, is that the CO-OPs aren’t built to function like normal insurers.

Structural flaws in the design of CO-OPs
For one thing, the plans are prohibited from using the loans for marketing purposes. So there isn’t an easy way for the plans to make consumers aware of them. The plans are prohibited from working with insurers already in operation, hence limiting their ability to gain from the experience of existing market players. The plans will have to enroll members and contract with providersâ€”but unless they are able to enroll a good mix of healthy and sick people, they’ll pay out more in claims than they take in premiums: the classic problem of adverse selection. Since healthy people have plenty of options already, it’s sick people who will be most likely to sign up for the CO-OP plans.

Because of these problems, Congress last summer stripped $2.2 billion from CO-OP appropriations, leaving the program with $3.8 billion in subsidized loans. Nevertheless, last July, the U.S. Department of Health and Human Services made public their projection that 36 percent of the remaining loans would go unpaid: a staggering $1.4 billion. When Congress demanded answers from HHS, the agency replied that “we believe that the changes we have madeâ€¦improve the potential viability of CO-OPs,” but maintained their previous insolvency projections.

White House projects 91 percent of CO-OP loans will fail
Then, in early 2012, the White House’s Office of Management and Budget projected that 91 percent of the CO-OP loans would go unpaid: $3.1 billion of the now-$3.4 billion program.
Rest assured that taxpayers will be stuck with the bill. As a letter from the House Energy & Commerce notes, “Because the CO-OP regulation does not specify any collateral for the loans, and, as mentioned above, holders of surplus notes are usually at the bottom rung in terms of priority if an insurer goes into rehabilitation or liquidation, the Federal taxpayer would be among the last in line for repayment should a CO-OP experience financial distress.” (Emphasis added.)

It’s not just Republicans who are concerned about the CO-OP disaster. Sen. John D. Rockefeller (D., W.Va.), an advocate of single-payer health care, haspointed out that “there has been no significant research into consumer co-ops as a model for health insurance. What we do know, however, is that this model was tried in the early part of the 20thcentury and largely failedâ€¦This is a dying business model for health insuranceâ€¦I believe it is irresponsible to invest over $6 billion in a concept that has not proven to provide quality, affordable health care.”

Labor union giveaways
Over at the Centers for Medicare and Medicaid Services, however, it’s full steam ahead. Earlier this month, CMS awarded $137 million to two new CO-OPs in Michigan and Nevada. I’ve obtained an internal CMS document containing talking points regarding the two giveaways.

The talking points concern, among other things, the fact that the Nevada plan is “sponsored by a Taft-Hartley (union) plan.” This, despite the fact that existing plans are specifically barred from receiving CO-OP loans. “The Affordable Care Act excludes pre-existing issuers from CO-OP participation,” CMS acknowledges, but because the union plan in this case is not licensed in Nevada, but in another state, according to CMS, they’re eligible to receive funds directed to Nevada. Okay then.

The funniest part of the document is when CMS asks itself, “aren’t loans like this risky?” Contrary to the agency’s own projections, let alone those of the White House, CMS says everything’s copacetic. “Loans will only be made to private, nonprofit entities that demonstrate a high probability of becoming financially viable.” According to the government, it seems, if you have a 9 percent chance of repaying your loans, you’ve demonstrated a “high probability” of success.

Remember that the next time someone tells you that government-run health care is “more efficient” than the private sector.